Rate Update November 12, 2009

Mortgage rates are unchanged from yesterday.

With a lack of significant of economic data mortgage rates are likely to react to this afternoon’s US Treasury auction.  The US Treasury is scheduled to auction $16 billion in US 30-year bonds.  A strong auction would bode well for mortgage rates and vice-versa.

On Monday the US Treasury auctioned $40 billion in 3-year notes and was met with record demand.  On Tuesday they auctioned $25 billion in 10-year notes and demand was not as strong.  Today they auction $16 billion in 30-year notes and we expect demand to be weaker than the previous two auctions because the duration of the bond issuance is longer.  Why would duration matter?

30-year Treasury bonds are currently yielding about 4.4%.  Would you be excited to earn 4.4% on your investment for 30 years when many economists predict inflation will increase to 4-5% in then next 5 years? (click on graph below for a detailed view)

30 yr treasury bond yields

Since rates are modestly better than last week we’re going to recommend a locking position.

Current outlook: locking bias